But to get there, we need to start taking taxi regulation seriously.

Google’s eye-popping $258 million investment in the car-hailing app company Uber made headlines last week. It’s the search giant’s biggest-ever venture capital investment, and it gives a much-discussed but rather small-scale company a delirious $3.5 billion valuation. But so far, the commentary on the deal—which has been mostly focused on bubble speculation and startup mania—has missed the real story.

Google’s interest in Uber is likely connected to their ongoing investments in driverless or autonomous cars, and it shows that the potential of this technology is much greater than is commonly realized. By the same token, however, the stakes in ongoing regulatory battles between tech startups and taxi regulators are higher than most people know. This is not just the future of yuppies getting a ride home from the bar. It’s a set of issues that has the potential to radically remake the American landscape.

But to get there, regulators would have to want cheaper and better taxi service. Current trends make it unclear that they do.

The basic issue in all these cases is whether the purpose of taxi regulation is to ensure that vehicles are safe or to preserve the income streams of existing license-holders. All cities do some of the former, but virtually everywhere the latter is an important consideration as well. Hence the widespread practice of imposing quantitative limits on the number of cabs allowed on the streets and the frequent sense that new smartphone-based services should be stamped out for daring to find a loophole in the rules.

Peter Faris, whose transportation company works with Uber, stands in front of one of his vehicles while holding a smartphone with the Uber app on Feb. 14, 2013, in Washington, D.C.

Photo by Paul J. Richards/AFP/Getty Images

After all, in most cities cabs are mainly for outsiders—visitors, not residents—and even where they’re regularly used by residents, taxis are seen as a bit of an extravagance for the privileged. Why not open up more opportunities to soak the tourists and the rich for the sake of the local small businessman?

The reason is the emerging technology of autonomous or “self-driving” cars.

In an op-ed proclaiming American innovation dead, University of Chicago economist Robert Gordon acknowledged the impressive progress Google has made in this sphere but dismissed it as small beer. Yes, computer-piloted cars might be safer, but “auto fatalities per million miles traveled have already declined by a factor of 10 since 1950,” he writes.

The problem is that Gordon, like many skeptics, imagines a world much like present-day America where there is more or less one car per adult. But instead of you driving the car, the car will drive you.

The real potential is for something quite different: ubiquitous taxis—summoned via smartphone or weird glasses—that are so cheap they make car ownership obsolete. That’s the kind of social and technological revolution that could justify the lofty valuation granted to Uber. It explains why the same company that’s invested in the technology to drive the cars is now investing in the technology to hail them. It’s a world in which algorithms for matching cabs with passengers and user interfaces for summoning taxis will become crucial elements of everyday transportation, the way gas stations and parking lots are today.

Conversely—and this is why it’s important—we’re not going to need all these gas stations and parking lots.

In a world of ubiquitous cheap taxis, you don’t need nearly as many cars. Since not everyone commutes at the exact same time, any given car can shuttle several different people to work. And the average commuting vehicle can be small enough for a single passenger to sit in comfortably. This smaller number of smaller cars could get by with radically fewer parking spaces. A large share of vehicles would be in motion at any given time. And if there’s need to store excess cars somewhere during off-peak hours (to save energy, perhaps), they could congregate at a handful of peripheral lots. Ordinary homes, offices, and shopping centers wouldn’t need the vast fields of parking that are required by current law. By the same token, the main present-day impediments to electric cars—expense and range—would vanish.

Most trips, after all, are short. But the big problem with electric vehicles is that building a battery big enough for long trips is extremely expensive. In a world of vehicles for hire, this is easily solved—take light, cheap, short-range electric vehicles for the short-range trips that constitute the vast majority of driving. Save the internal combustion engines for the rare cases when they’re genuinely needed.

Cities based on cheap autonomous cabs would be much greener than today’s cities. Without the parking, they’d also be denser and more productive, but people wouldn’t have to sacrifice their large homes. It would be a true economic game-changer. But to get there we don’t just need the technology—we need the rules to allow it. Cars for hire, just like regular cars, need to be safe but shouldn’t face arbitrary numerical caps or other rules designed to repress competition. We need local transportation regulation to emphasize the needs of consumers, not producers, and to encourage innovation, not fear it.